nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒03‒01
eleven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Rationality of Choices in Subsidized Crop Insurance Markets By Xiaodong Du; Hongli Feng; David A. Hennessy
  2. Sons as Widowhood Insurance: Evidence from Senegal By Sylvie Lambert; Pauline Rossi
  3. Purchasing Life Insurance to Reach a Bequest Goal By Erhan Bayraktar; David Promislow; Virginia Young
  6. The Effects of the Massachusetts Health Reform on Financial Distress By Mazumder, Bhashkar; Miller, Sarah
  7. IFRS Standards and Insurance Companies: What Stakes for Long-Term Investment? A French Case Explanatory Analysis By Samira Demaria; Sandra Rigot
  8. Do Migrants Send Remittances as a Way of Self-Insurance? Evidence from a Representative Immigrant Survey By Catia Batista; Janis Umblijs
  9. Modelling spatiotemporal variability of temperature By Xiaofeng Cao; Ostap Okhrin; Martin Odening; Matthias Ritter
  10. Financial work incentives for disability benefit recipients: Lessons from a randomized field experiment By Buetler, Monika; Lechner, Michael; Thiemann, Petra; Deuchert, Eva; Staubli, Stefan
  11. Effect of Pensions and Disability Benefits on Retirement in the UK By James Banks; Carl Emmerson; Gemma Tetlow

  1. By: Xiaodong Du; Hongli Feng; David A. Hennessy (Center for Agricultural and Rural Development (CARD))
    Abstract: The U.S. crop insurance market has several features that set it apart from other insurance markets. These include:(a) explicit government subsidies with an average premium subsidy rate of about 60% in recent years; and (b) the legislative requirement that premium rates be set at actuarially fair levels, where the federal government sets rates and pays all costs related to insurance policy sales and services. Bearing these features in mind, we examine to what extent farmers’ crop insurance choices conform to economic theory. A standard expected utility maximization framework is set up to analyze tradeoffs between higher risk protection and larger subsidy payments. Given an actuarially fair premium, a rational farmer should choose either the coverage level with the highest premium subsidy or a higher coverage level. Evidence from a large insurance unit level dataset contradicts this theoretical inference, and so suggests anomalous insurance decisions. Mixed logit estimation reveals that larger out-of-pocket premium reduces the probability that an insurance product is chosen.
    Keywords: actuarial fairness; behavioral anomalies; premium subsidy; under-insurance. JEL Classification: D03, H25, Q18. Highlights: • Under standard economic theory, farmers should choose subsidized crop insurance contracts at high coverage levels. • Scrutiny of contract choice data shows that farmers underinsure their crops. • A mixed logit model suggests that behavior is motivated by aversion to incurring out-of-pocket premiums.
    Date: 2014–02
  2. By: Sylvie Lambert (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Pauline Rossi (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: Exploiting original data from a Senegalese household survey, we provide evidence that fertility choices are partly driven by women's needs for widowhood insurance. We use a duration model of birth intervals to show that women most exposed to the risk of widowhood intensify their fertility until they get a son. Insurance through sons entails substantial health costs : short birth spacing raises maternal and infant mortality rates.
    Keywords: Intra-household insurance ; Gender ; Fertility ; Health ; Senegal
    Date: 2014–02–17
  3. By: Erhan Bayraktar; David Promislow; Virginia Young
    Abstract: We determine how an individual can use life insurance to meet a bequest goal. We assume that the individual's consumption is met by an income, such as a pension, life annuity, or Social Security. Then, we consider the wealth that the individual wants to devote towards heirs (separate from any wealth related to the afore-mentioned income) and find the optimal strategy for buying life insurance to maximize the probability of reaching a given bequest goal. We consider life insurance purchased by a single premium, with and without cash value available. We also consider irreversible and reversible life insurance purchased by a continuously paid premium; one can view the latter as (instantaneous) term life insurance.
    Date: 2014–02
  4. By: Jean M. Abraham, Ph.D.; Roger Feldman, Ph.D.; Peter Graven, M.S.
    Abstract: This study investigates how changes in the economic incentives created by the Affordable Care Act (ACA) will affect the probability that private-sector U.S. employers will offer health insurance. Using the Medical Expenditure Panel Survey Insurance Component for 2008-2010, we predict employers’ responses to key ACA provisions. Our simulations predict that overall demand for insurance will rise, driven by workers’ desire to avoid the individual mandate penalty and the availability of premium tax credits in exchanges. Our analyses also suggest that the average probability of an establishment offering insurance will decline from .83 to .66 with ACA implementation, although there is considerable variation by firm size, industry and union status.
    Keywords: health insurance, Affordable Care Act; premium tax credits; employer behavior
    JEL: I1 I13 J3
    Date: 2014–01
  5. By: Jean M. Abraham, Ph.D.; Roger Feldman, Ph.D.; Peter Graven, M.S.
    Abstract: Economic incentives such as the preferential tax treatment of premiums and economies of scale encourage employers to provide health insurance through the workplace. The employer’s decision to offer health insurance depends on how much workers value insurance relative to wages, and that value is likely to vary, given the composition of the establishment´s workforce. Using the 2008-2010 MEPS Insurance Component augmented with information from other data sources, we generate new estimates of employers’ price-sensitivity of offering insurance. Our results suggest that employers are sensitive to changes in the tax price of insurance, with very small employers exhibiting the largest price-sensitivity. Employer size, workforce composition, and local labor market conditions also influence the employer’s decision to offer insurance. New evidence can inform policy discussions about the implications of broad-based reforms that change marginal tax rates as well as targeted strategies that address the tax-exempt status of premiums.
    Date: 2014–01
  6. By: Mazumder, Bhashkar (Federal Reserve Bank of Chicago); Miller, Sarah (University of Notre Dame)
    Abstract: A major benefit of health insurance coverage is that it protects the insured from unexpected medical costs that may devastate their personal finances. In this paper, we use detailed credit report information on a large panel of individuals to examine the effect of a major health care reform in Massachusetts in 2006 on a broad set of financial outcomes. The Massachusetts model served as the basis for the Affordable Care Act and allows us to examine the effect of coverage on financial outcomes for the entire population of the uninsured, not just those with very low incomes. We exploit plausibly exogenous variation in the impact of the reform across counties and age groups using levels of pre-reform insurance coverage as a measure of the potential effect of the reform. We find that the reform reduced the total amount of debt that was past due, the fraction of all debt that was past due, improved credit scores and reduced personal bankruptcies. We also find suggestive evidence that the reform lowered the total amount of debt and decreased third party collections. The effects are most pronounced for individuals who had limited access to credit markets before the reform. These results show that health care reform has implications that extend well beyond the health and health care utilization of those who gain insurance coverage.
    Keywords: Health care reform; health insurance; financial distress
    JEL: H75 I11 I13
    Date: 2014–01–23
  7. By: Samira Demaria (GREDEG CNRS; University of Nice Sophia Antipolis); Sandra Rigot (CEPN CNRS; University of Paris North)
    Abstract: This paper investigates to what extent IFRS standards may cause incentives or constraints on long-term investment strategies of French insurance companies, based on 43 semi-structured interviews of insurance companies’ managers, regulators and professional organizations in France. Our results show that practitioners highlight some issues related to the capacity of current IFRS accounting rules to give a fair representation of their activities related to their specific profile. First, they underline an artificial mismatch between assets and liabilities measurement related to IAS 39 and IFRS 4 phase 1. Second, they point out effects on their asset allocation strategies due to the increased short-term volatility introduced by fair value measurement. After investigating solutions to recognising the long-term horizon in asset category, we discuss the necessary consistency of accounting standard for representing long-term business.
    Keywords: Insurance industry, long-term investment, IFRS accounting
    JEL: M41
    Date: 2014–02
  8. By: Catia Batista (Nova University of Lisbon); Janis Umblijs (Ragnar Frisch Centre for Economic Research, Oslo, Norway)
    Abstract: Do migrants send remittances as a way of obtaining insurance? While this motive is theoretically suggested in the literature, the question of identifying this relationship empirically has only begun to be explored. Using a unique representative survey of 1500 immigrants in the Greater Dublin Area, Ireland, we find a positive and signicant relationship between risk aversion and remittance behavior. Risk-averse individuals are more likely to send remittances home and are, on average, likely to remit a higher amount, after controlling for a broad range of individual and group characteristics. Consistent with a purchase of self insurance motive to remit, we also provide evidence of more remittances sent by risk averse immigrants facing higher wage risks and remitting to individuals with more financial resources.
    Keywords: Migration, Risk Aversion, Remittances, Insurance
    JEL: D81 F22 F24 J01 J08 J15 J61
    Date: 2014–02
  9. By: Xiaofeng Cao; Ostap Okhrin; Martin Odening; Matthias Ritter
    Abstract: Forecasting temperature in time and space is an important precondition for both the design of weather derivatives and the assessment of the hedging effectiveness of index based weather insur-ance. In this article, we show how this task can be accomplished by means of Kriging techniques. Moreover, we compare Kriging with a dynamic semiparametric factor model (DSFM) that has been recently developed for the analysis of high dimensional financial data. We apply both methods to comprehensive temperature data covering a large area of China and assess their performance in terms of predicting a temperature index at an unobserved location. The results show that the DSFM performs worse than standard Kriging techniques. Moreover, we show how geographic basis risk inherent to weather derivatives can be mitigated by regional diversification.
    Keywords: weather insurance, semiparametric model, factor model, Kriging, geographic basis risk
    JEL: C14 C53 G32
    Date: 2014–02
  10. By: Buetler, Monika; Lechner, Michael; Thiemann, Petra; Deuchert, Eva; Staubli, Stefan
    Abstract: Disability insurance (DI) beneficiaries lose some of their benefits if their earnings exceed certain thresholds (“cash-cliffs”). When this reduction is too high, this implicit taxation of earnings is considered to be one of the prime reasons for the low outflow from DI. This paper analyzes a conditional cash program that incentivizes work related reductions of disability benefits in Switzerland. A randomized group of DI beneficiaries receive the offer to claim a payment of up to CHF 72,000 (USD 71,000) if they take up or expand employment and reduce DI claims. This paper presents the results of the short-term evaluation by analyzing the first reactions to the announcement of seed capital. Overall, the interest in taking-up the financial incentive is low at only 3%. Individuals close to cash-cliffs react more on seed capital but the overall magnitude is small. Our results suggest that workdisincentives imposed by cash-cliffs are unlikely to be the main driver for low employment and outflow from the Swiss disability insurance system, despite the fact that the partial disability insurance system generates a non-linear budget set and bunching behavior at cashcliffs prior to the implementation of seed capital.
    Keywords: Disability insurance, field experiment, financial incentive
    JEL: H55 J14 C93 D04
    Date: 2014–02
  11. By: James Banks; Carl Emmerson; Gemma Tetlow
    Abstract: This paper examines to what extent differences in employment rates across those in better and worse health in the UK can be explained by the availability of publicly-funded disability insurance and the financial incentives provided by other retirement income schemes. Using an option value approach, we find that individuals’ labor force participation is affected by financial incentives. A one standard deviation change in the option value is estimated to reduce the likelihood of an individual leaving the labor market in the next year by between 2.7 and 3.1 percentage points, relative to an average exit probability of 9.4%. This suggests the variation in financial incentives across different individuals could explain a significant proportion of retirements. However, we find no evidence that individuals with different levels of health respond to our measure of financial incentives differently. We also conclude that it would require a very large change in the stringency of the disability insurance program on its own to generate an economically significant change in overall employment rates of older workers in the UK. This reflects the fact that – for many individuals in the UK – the level of disability benefits they might be able to receive is low relative to the amount they could earn and, therefore, large changes in rates of eligibility would not induce large changes in overall employment rates.
    JEL: H55 J21 J26
    Date: 2014–02

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